PROFESSIONAL ASSET MANAGEMENT
MULTIPLE CHOICE QUESTIONS
(d) 1 Which of the following is an approach to asset management?
a) Management and advisory firms b) Investment companies
c) Strategic management d) Choices a and b only e) All of the above
(b) 2 An open-end investment company is commonly referred to as a(n) a) Balanced fund.
b) Mutual fund.
c) Money market fund.
d) Accessible fund.
e) Unit trust.
(a) 3 The main difference between a closed-end fund and an open-end fund is a) The way each is traded after the initial public offering.
b) There is no significant difference.
c) The minimum initial investment.
d) The type of allowable investments.
e) The way in which each is regulated by the SEC.
(b) 4 Net asset value (NAV) is determined by
a) The total market value of all its assets multiplied by the number of fund shares outstanding.
b) The total market value of all its assets divided by the number of fund shares outstanding.
c) The total market value of all its assets divided by the number of shareholders.
d) Supply and demand for the investment company stock in the secondary market.
e) Supply and demand for the investment company stock in the primary market.
(a) 5 The market price of a closed-end investment company has generally been a) 5 to 20 percent below the NAV.
b) 25 to 35 percent below the NAV.
c) Equal to the NAV (within a 2 percent range).
d) 5 to 20 percent above the NAV.
e) 25 to 35 percent above the NAV.
(c) 6 The closed-end fund index is
a) Value weighted and based on market values.
b) Value weighted and based on NAVs.
c) Price weighted and based on market values.
d) Price weighted and based on NAVs.
e) Equally weighted and based on market values.
(d) 7 Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as
(c) 8 A 12b-1 plan allows funds to a) Charge a redemption fee.
b) Deduct 7 to 8 percent commission at the initial offering.
c) Deduct .75 percent of the average net assets per year.
d) Charge a contingent deferred sales load.
e) Switch from closed-end to open-end.
(d) 9 When the offer price and the NAV of a mutual fund are equal it is an indication that a) The fund’s assets are in equilibrium.
b) The fund is trading at par.
c) It is strictly a coincidence.
d) The fund has no initial fee.
e) The fund is backloaded.
(c) 10 All investment companies charge an annual a) 12b-1 fee.
b) Marketing and distribution.
c) Management fee.
d) Maintenance fee.
e) Market adjustment.
(b) 11 The offering price of a load fund equals the NAV of the fund a) Less an initial requirement.
b) Plus a sales charge.
c) Plus a sales charge and an administrative fee.
d) Less a negotiated discount.
e) At its stated value.
(b) 12 Funds that normally contain a combination of common stock and fixed income
(d) 13 Funds that attempt to provide current income, safety of principal and liquidity are known as
(e) 14 A money market fund would be likely to invest in a portfolio containing all of the following except
a) Commercial paper.
b) Banker's acceptances.
c) U.S. Treasury bills.
d) Bank certificates of deposit.
e) U.S. Treasury notes.
(d) 15 A mutual fund typically performs all of the following functions, except a) Provides alternative risk-return options.
b) Eliminates unsystematic risk.
c) Provides diversification.
d) Derives a adjusted performance that is consistently superior to risk-adjusted net return of the aggregate market.
e) Administers the account, keeps records and provides timely information.
(b) 16 Mutual fund performance studies have shown that most funds
a) Have risks and returns that are inconsistent with their stated objectives.
b) Have risks and returns that are consistent with their stated objectives.
c) Do not have stated objectives.
d) Have experienced risk-adjusted returns above the market.
e) Have changed their objectives over time.
(c) 17 The text offers a number of suggestions for investing in mutual funds. Which of the following is not such a suggestion?
a) Choose only those mutual funds which are consistent with your objectives and constraints.
b) Invest in no-load funds whenever possible.
c) Avoid investing in index funds.
d) Use a dollar cost average strategy.
e) None of the above (that is, all are valid suggestions for investing in mutual funds)
(e) 18 The gross return of closed-end investments companies has typically been a) 10 - 20 percent less than their NAV.
b) 10 - 15 percent less than their NAV.
c) Less than the net return.
d) About the same as the net return.
e) None of the above
(e) 19 A major question in modern finance regarding closed-end investment companies is a) Why do these funds sell at discounts?
b) Why do the discounts differ between funds?
c) What are the returns available to investors from funds that sell at a large discount?
d) Choices a and b only e) All of the above
(b) 20 A portfolio manager should be able to perform all of the following functions, except a) Determine risk-return preferences.
b) Eliminate systematic risk.
c) Maintain diversification ensuring a stabilized risk class.
d) Attempt to derive a risk-adjusted performance that is superior to the market.
e) Administer the account, keep records and provide timely information.
(b) 21 An investment company is
a) A corporation that handles the administrative functions for a fund.
b) A corporation that has its major assets in a portfolio of securities.
c) A corporation that invests in financial services firms.
d) a) and b).
e) a) and c).
(a) 22 An investment management company is
a) A corporation that handles the administrative functions for a fund.
b) A corporation that has its major assets in a portfolio of securities.
c) A corporation that invests in financial services firms.
d) a) and b).
e) a) and c).
(d) 23 In the case of private management firms
a) Investors deal with a fund company and do not have separate accounts tailored to their specific needs.
b) Investors deal with a fund company and have separate accounts tailored to their specific needs.
c) Investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
d) Investors deal with an asset manager have separate accounts tailored to their specific needs.
e) None of the above.
(a) 24 In the case of investment companies
a) Investors deal with a fund company and do not have separate accounts tailored to their specific needs.
b) Investors deal with a fund company and have separate accounts tailored to their specific needs.
c) Investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
d) Investors deal with an asset manager have separate accounts tailored to their specific needs.
e) None of the above.
(e) 25 In the case of open-end investment companies, shares of the company a) Trade on the secondary market.
b) Can be bought from or sold to the investment company at the NAV.
c) Are determined by supply and demand.
d) a) and c).
e) b) and c).
(d) 26 In the case of closed-end investment companies, shares of the company a) Trade on the secondary market.
b) Can be bought from or sold to the investment company at the NAV.
c) Are determined by supply and demand.
d) a) and c).
e) b) and c).
(d) 27 The following are examples of mutual fund companies a) Common stock funds.
b) Bond funds.
c) Hedge funds.
d) a) and b).
e) a), b) and c)
(b) 28 An example of an international fund would be one that consisted of investments in securities from
a) The U.S., Germany, and Japan.
b) Germany, Italy, and the U.K.
c) The U.S., Korea, and Argentina.
d) All of the above.
e) None of the above.
(d) 29 The Investment Company Act of 1940
a) Contains various anti-fraud provisions and record keeping and reporting requirements for fund advisors.
b) Regulates broker-dealers.
c) Requires federal registration of all public offerings of securities.
d) Regulates the structure and operations of mutual funds.
e) Contains a code of ethics and standards of professional conduct.
(c) 30 The Securities Act of 1933
a) Contains various anti-fraud provisions and record keeping and reporting requirements for fund advisors.
b) Regulates broker-dealers.
c) Requires federal registration of all public offerings of securities.
d) Regulates the structure and operations of mutual funds.
e) Contains a code of ethics and standards of professional conduct.
(b) 31 The Securities Exchange Act of 1934
a) Contains various anti-fraud provisions and record keeping and reporting requirements for fund advisors.
b) Regulates broker-dealers.
c) Requires federal registration of all public offerings of securities.
d) Regulates the structure and operations of mutual funds.
e) Contains a code of ethics and standards of professional conduct.
(a) 32 The Investment Advisors Act of 1940
a) Contains various anti-fraud provisions and record keeping and reporting requirements for fund advisors.
b) Regulates broker-dealers.
c) Requires federal registration of all public offerings of securities.
d) Regulates the structure and operations of mutual funds.
e) Contains a code of ethics and standards of professional conduct.
(d) 33 Soft dollars are generated when
a) A manager commits to paying a higher than normal brokerage fee in exchange for additional bundled services.
b) A manager commits to paying a higher than normal brokerage fee in exchange for secretarial services.
c) A manager commits to paying a higher than normal brokerage fee in exchange for office equipment.
d) All of the above.
e) None of the above.
(a) 34 Which of the following is a characteristic of hedge funds
a) They are generally less restricted in how and where they can make investments.
b) They are more liquid than mutual fund shares.
c) They have no limitations on when and how often investment capital can be contributed or removed.
d) All of the above.
e) None of the above.
(a) 35 In a long short-short hedge fund strategy
a) Managers take long positions in undervalued stocks and short positions in overvalued stocks.
b) Managers take short positions in undervalued stocks and long positions in overvalued stocks.
c) Managers take offsetting risk positions on the long and short side.
d) All of the above.
e) None of the above.
(b) 36 In a convertible arbitrage strategy hedge fund managers attempt to
a) Generate profits by taking advantage of convertible bond pricing disparities caused by changing market events.
b) Generate profits by taking advantage of disparities in the relationship between prices for convertible bonds and the underlying common stock.
c) Generate profits by taking advantage of disparities in the relationship between prices for convertible bonds and the underlying common stock option.
d) All of the above.
e) None of the above.
(d) 37 Ethical conflicts may arise as a result of a) Incentive compensation schemes.
b) Soft dollar arrangements.
c) Marketing investment management services.
d) All of the above.
e) None of the above.
(d) 38 Which of the following are guiding principles for ethical behavior in the asset management industry as put forward by the CFA Center for Financial Market Integrity
a) The interests of investment professional come first.
b) The preferred method for promoting fair and efficient markets is to set up a central oversight board.
c) Financial markets in various countries should develop high-quality standards for reporting financial information that reflect local customs.
d) Financial statements should be reported from the perspective of firm shareholders.
e) All of the above.
(c) 39 Which of the following are functions that a portfolio manager should perform for clients
a) Determine investment objectives and constraints, diversify the portfolio, eliminate tax payments.
b) Determine investment objectives, diversify the portfolio, maintain ethical standards and eliminate tax payments.
c) Determine investment objectives and constraints, diversify the portfolio, and maintain ethical standards.
d) Determine constraints, diversify the portfolio, eliminate tax payments.
e) Determine investment objectives and constraints, diversify the portfolio, eliminate tax payments, and achieve risk adjusted return superior to the relevant benchmark.
MULTIPLE CHOICE PROBLEMS
USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Suppose ABC Mutual fund owned only 4 stocks as follows:
Stock Shares Price
W 2500 $11
X 2100 14
Y 2700 23
Z 1900 15
(b) 1 The fund originated by selling $100,000 of stock
at $10.00 per share. What is its current NAV?
a) $ 1.47 b) $ 14.75 c) $ 16.03 d) $ 27.62 e) $234.12
(d) 2 What is the offering price for the fund if the
NAV is $25.25 and a the load is 6 percent?
a) $26.19 b) $23.74 c) $25.25 d) $26.77 e) $24.13
(d) 3 Suppose Mega Mutual Fund owns only the 4 stocks shown below with no liabilities.
Stock Shares Price
A 1800 15
B 2200 11
C 2300 9
D 1900 18
The fund originated by selling $300,000 of stock at $30.00 per share. What is its current NAV?
a) $106.10
b) $12.94
c) $129.40 d) $10.61
e) None of the above
(a) 4 Suppose Under Mutual Fund owns only the 3 stocks shown below with no liabilities.
Stock Shares Price
A 2900 15
B 3100 14
C 3200 12
The fund originated by selling $500,000 of stock at $50.00 per share. What is its current NAV?
a) $12.53
b) $15.29
c) $152.90 d) $125.30
e) None of the above
(b) 5 Suppose you consider investing $1,000 in a load fund which charges a fee of 2%, and you expect the fund to earn 14% over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 9% and charges a 1/2 percent redemption fee. Which is better and by how much?
a) Funds are equal b) Load fund by $32.65 c) Load fund by $50.55 d) No-load fund by $64.55 e) No-load fund by $44.30
(d) 6 Suppose you consider investing $1,000 in a load fund which charges a fee of 2%, and you expect the fund to earn 11% over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 7% and charges a 1/2 percent redemption fee. Which is better and by how much?
a) Funds are equal
b) No-load fund by $36.98 c) Load fund by $45.25 d) Load fund by $23.15 e) No-load fund by $15.52
(b) 7 Suppose you consider investing $15,000 in a load fund from which a fee of 5% is deducted and you expect the fund to earn 12% over the next year. Alternatively, you could invest in a no load fund which is expected to earn 10% and which takes a 1/2 percent redemption fee. Which is better and by how much?
a) Load fund by $318.45 b) No load fund by $457.50 c) Funds are equal
d) Load fund by $415.10 e) No load fund by $211.51
(b) 8 Suppose you consider investing $10,000 in a load fund from which a fee of 3% is deducted and you expect the fund to earn 12% over the next year. Alternatively, you could invest in a no load fund which is expected to earn 10% and which takes a 0 percent redemption fee. Which is better and by how much?
a) Load fund by $151 b) No load fund by $136 c) Funds are equal d) No load fund by $421 e) Load fund by $115
(b) 9 Suppose you consider investing $5,000 in a load fund from which a fee of 8% is deducted and you expect the fund to earn 12% over the next year. Alternatively, you could invest in a no load fund which is expected to earn 10% and which takes a 1/2 percent redemption fee. Which is better and by how much?
a) Load fund by $57.50 b) Load fund by $575.50 c) Funds are equal
d) No load fund by $575.50 e) No load fund by $57.50
(b) 10 On January 2, 2003, you invest $10,000 in Megabucks Mutual Fund, a load fund that charges a fee of 2%. The fund’s returns were 13% in 2003, 11% in 2004, 8% in 2005.
On December 31, 2005 you redeem all your shares. The dollar value is a) $13,600.00
b) $13,275.51 c) $13,297.67 d) $13,995.75 e) $10,000.00
(c) 11 On January 2, 2003, you invest $50,000 in the Lizbiz Mutual Fund, a load fund that charges a fee of 5%. The fund’s returns were 14.6% in 2003, -6.4% in 2004, 15.2% in 2005. On December 31, 2005 you redeem all your shares. The dollar value is
a) $66,722.27 b) $15,200.00 c) $58,695.74 d) $33,366.25 e) $10,000.00
(b) 12 On January 2, 2003, you invest $100,000 in the Jeffers Mutual Fund, a load fund that charges a fee of 5%. The fund’s returns were -14.6% in 2003, -6.4% in 2004, 35% in 2005. On December 31, 2005 you redeem all your shares. The dollar value is:
a) $95,600.57 b) $102,515.90 c) $83,297.75 d) $133,995.75 e) $100,000.00
(c) 13 On January 2, 2003, you invest $10,000 in the Tiger Fund, a load fund that charges a fee of 6%. The fund’s returns were 25% in 2003, 35% in 2004, -5% in 2005. On December 31, 2005 you redeem all your shares of Tiger. The dollar value is
a) $5,200.89 b) $13,345.89 c) $7,931.25 d) $15,896.34 e) $8,646.91
(e) 14 On January 2, 2003, you invest $10,000 in the W.O.W. Mutual Fund, a load fund that charges a fee of 5%. The fund’s returns were 13.6% in 2003, 12.2% in 2004, 8.3% in 2005. On December 31, 2005 you redeem all your W.O.W. shares. The dollar value is
a) $13,600.00 b) $13,664.13 c) $10,000.00 d) $131,136.40 e) $13,113.64
(b) 15 On January 2, 2003, you invest $10,000 in the Dog Mutual Fund, a load fund that charges a fee of 7%. The fund’s returns were 12.8% in 2003, 13.9% in 2004, 7.9% in 2005. On December 31, 2005 you redeem all your shares. The dollar value is
a) $12,800.00 b) $12,892.50 c) $100,000.00 d) $128,925.00 e) $10,000.00
(a) 16 On January 2, 2003, you invest $50,000 in A Mutual Fund, a load fund that charges a fee of 7%. The fund’s returns were 12.8% in 2003, 13.9% in 2004, 7.9% in 2005. On December 31, 2005 you redeem all your shares in A. The dollar value is
a) $64,462.57 b) $644,625.70 c) $50,000.00 d) $6,446.25 e) $10,000.00
(d) 17 On January 2, 2003, you invest $100,000 in Righteous, a load fund that charges a fee of 7%. The fund’s returns were 12.8% in 2003, 13.9% in 2004, 7.9% in 2005. On December 31, 2005 you redeem all your Righteous shares. The dollar value is
a) $12,800.00 b) $12,892.50 c) $100,000.00 d) $128,925.00 e) $10,000.00
(b) 18 Consider the Defiance Bond Fund that consists of the 3 bonds shown below and has no liabilities.
Company Current Bond Value # Bonds
Komko 980 120
Hijack 1010 150
Mitsue 1200 100
If initially the value of the fund was $250,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?
a) $25.00
b) $38.91
c) $39.81
d) $31.98
e) $39.91
(d) 19 Consider X Bond Fund which consists of the 5 bonds shown below with no liabilities.
Company Current Bond Value # Bonds
Komko 980 120
Hijack 1010 150
Mitsue 1200 100
Smitsu 800 120
Jones 600 150
If initially the value of the fund was $1,000,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?
a) $25.00
b) $27.68
c) $25.68
d) $28.76
e) $26.78
(a) 20 Consider the Compliance Bond Fund that consists of the 7 bonds shown below and has no liabilities.
If initially the value of the fund was $2,500,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?
a) $27.11 for fund X, assuming an initial investment of $1000 calculate the value of the investment at the end of 5 years. for fund Y, assuming an initial investment of $1000 calculate the value of the investment at the end of 5 years
(c) 23 Calculate the annual rate of return for a mutual fund with the following fees and expected returns
Investment E(Return) Load 12b-1 fee
Years Held
Mutual Fund 7% 4%
0.50% 7 years
a) 4.95%
b) 5.0%
c) 5.85%
d) 2.5%
e) 6.55%
CHAPTER 24
ANSWERS TO PROBLEMS
1 Original number of shares = $100,000/$10 = 10,000
Shares Price MV
W 2500 $11 $27,500
X 2100 14 $29,400
Y 2700 23 $62,100
Z 1900 15 $28,500
TOTAL $147,500
NAV = $147,500/10,000 = $14.75
2 Offering price = NAV + NAV x Load percentage
= $25.25 + 25.25(0.06) = $26.77
3 Original number of shares = $300,000 ÷ $30 = 10,000 Stock Shares Price Market Price
A 1800 15 27,000
B 2200 11 24,200
C 2300 9 20,700
D 1900 18 34,200
Total = 106,100 NAV = $106,100 ÷ 10,000 = $10.61
4 Original number of shares = $500,000 ÷ $50 = 10,000 Stock Shares Price Market Price
AA 2900 15 43,500
BB 3100 14 43,400
CC 3200 12 38,400
Total = 125,300 NAV = $125,300 ÷ 10,000 = $12.53
5 Load Fund: $1,000 (1.00 - 0.02) (1.14) = $1117.20 No-Load Fund: $1,000 (1.09)(1.00 - 0.005) = $1084.55 The difference is 1117.20 - 1084.55 = $32.65
Load fund is better.
6 Load Fund: $1,000 (1.00 - 0.02) (1.11) = $1087.80 No-Load Fund: $1,000 (1.07)(1.00 - 0.005) = $1064.65 The difference is $1087.80 - $1064.65= $23.15
Load fund is better.
7 Load Fund $15,000 (1.00 - 0.05) (1.12) = $15960 No-Load Fund $15,000 (1.10) (1.00 - .005) = $16417.50 The difference is $16417.50 - $15960 = $457.50
No-Load fund is better.
8 Load Fund $10,000 (1.00 - 0.03) (1.12) = $10864 No-Load Fund $10,000 (1.10) = $11000
The difference is $11000 - $10864 = $136 No-Load fund is better.
9 Load Fund $5,000 (1.00 - 0.08) (1.12) = $6048.00 No-Load Fund $5,000 (1.10) (1.00 - .005) = $5472.50 The difference is $6048.00 - $5472.50 = $575.50
Load fund is better.
10 Dollar value = $10,000 (1.13)(1.11)(1.08)(1.00 - 0.02) = $13275.51 11 Dollar value = $50,000 (1.146)(0.936)(1.152)(1.00 - 0.05) = $58695.74 12 Dollar value = $100,000 (0.854)(0.936)(1.35)(1.00 - 0.05) = $102515.90
13 Dollar value = $10,000 (1.25)(1.35)(0.5)(1.00 - 0.06) = $7931.25 14 Dollar value = $10,000 (1.136)(1.122)(1.083)(1.00 - 0.05) = $13,113.64 15 Dollar value = $10,000 (1.128)(1.139)(1.079)(1.00 - 0.07) = $12,892.50 16 Dollar value = $50,000 (1.128)(1.139)(1.079)(1.00 - 0.07) = $64,462.51 17 Dollar value = $100,000 (1.128)(1.139)(1.079)(1.00 - 0.07) = $128,925.02 18 Original # of shares = 250,000 ÷ 25 = 10,000
NAV = 389,000 ÷ 10,000 = $38.91
19 Original # of shares = 500,000 ÷ 25 = 20,000 NAV = 575,100 ÷ 20,000 = $28.76
20 Original # of shares = 800,000 ÷ 25 = 32,000 NAV = 867,600 ÷ 32,000 = $27.11
21 $1000(1 - 0.025)(1 + .10)5(1 - 0.0025)5 = $1,550.77 22 $1000(1 + 0.08)5(1 - 0.005)5(1 - .03) = $1,389.95 23 $1(1 – 0.04)(1 + 0.07)7(1 - 0.005)7 = $1.4884
Annual return = 1.48841/7 – 1 = 0.05845 = 5.85%